This report looks at the class of empirical results brought forward by experimental and empirical economics, in an attempt to understand the propensity to risk of individuals at aggregate, national levels and to analyze what changes it brings to people’s common behavior when dramatic, unexpected events occur. Theoretical measures of risk aversion are briefly presented to introduce the results obtained from empirical and experimental studies in the last half of century. Then, a composite index of propensity to risk is proposed (CIPR), by making use of the empirical results that, at the aggregate level of a society, correspond to a number of risk drivers, correlated to the attitude of individuals towards uncertainty. The results obtained for a set of developed countries (Western Europe, Japan and the United States) reveal that while macro, worldwide dramatic events generate unidirectional consequences for all nations – with the aversion to risk shifting on increasing paths – the micro, country-specific events generate a variety of responses, specific to each region. With the understanding of countries’ risk propensity to hand, we derive conclusions on the aggregate portfolio investment decisions during the past fifteen years.

, Apr 12, 2011

The results indicate that the risk aversion index has a good explanatory power for the investment decisions related to financial assets such as bank deposits and securities, whereas investments in insurance products are not directly and exclusively predictable from risk attitudes. This is mainly due to the complexity of insurance products, combining investment opportunities and pure insurance products. Two additional motivations are evident in correspondence to the investments in insurance: i) the long time lags specific to these options can outbalance the portfolio investment decisions in favor of bank deposits and securities, characterized by short-term perspectives, and ii) different countries usually enact different insurance-related policies, such as pension plans, regulations etc. In the long-term perspective, the results show that some countries tend to be more risk-averse than others. In Japan, for instance, despite of its risk-averse historical profile, the most recent evidence indicates how investment decisions have turned onto a risk-seeking path recently – understandable given the ultra-low yield environment in this country. The entrepreneurial spirit of Japanese investors is capable of breaking the stereotypes we used to imagine about this culture. In Europe, the case of France has a demographic explanation: given its relatively high birth rates, French households seem to have a tendency of accepting uncertainty more readily than people from other countries where the ageing process is in full swing, causing an increase in the levels of risk aversion. Interestingly, Portugal, Spain and above all Greece were all on decreasing risk aversion trends, showing indulgence for risky investments during the “boom years,” whereas Ireland has developed an increasing sensibility to risk early on. The United States is found to be representative for the risk-seeking behavior, although the financial crisis has definitely prompted a dramatic change of perspective in the opposite direction. Undoubtedly, the risk attitude is not stable over time: it changes with the economic turmoil. Whenever unexpected events occur, the shield of protection against risky investments is raised.